SYDNEY — A recent spike in Australia’s energy prices is threatening to keep inflation higher for longer, a major reason policymakers this week felt compelled to hike interest rates by the most in two decades and warn of a lot more to come.
The surprisingly sharp half-point rate rise to 0.85% came even as consumer sentiment hit depths last seen during the worst of the pandemic and house prices in Sydney and Melbourne suffered a third month of losses.
Among the justifications cited by the Reserve Bank of Australia (RBA) was that rising energy prices meant inflation was now set to be higher than expected just a month ago.
“The energy market has been hit by a perfect storm of rising demand, a reduction in output from coal fired base load generation plus record high coal and gas prices,” says Justin Smirk, a senior economist at Westpac.
That is likely to be a shock for the RBA given it had long argued that inflation was less of a problem in resource-rich Australia precisely because energy costs had not surged here.
Australia had lagged industrialized peers such as the United States and New Zealand in shifting away from the crisis-mode monetary settings of the pandemic and had up until recently urged patience on price pressures caused by supply bottlenecks. It delivered its first rate hike in over a decade in May.
The Labor government, in just its third week in power, has promised to ease the cost of living crisis in an October budget, but has no easy solution for the energy spiral.
Last week, Australia’s energy market operator capped wholesale gas prices in southern states and activated for the first time a guarantee…
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